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Chicago Condo Building - Non-Warrantable Condo

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What is a Non-Warrantable Condominium?

A non-warrantable condominium is a condo unit or building that fails to meet the minimum financing or operational standards required for a mortgage approval.

A Longer Definition: Non-Warrantable Condominium

A non-warrantable condo is a condo unit or building in which a home buyer cannot get a conventional, FHA, VA, or USDA mortgage approved because the building falls short of basic financial or operational stability standards.

Non-warrantable condos aren’t actually defined in mortgage guidelines. Rather, condo buildings apply for warrantability status, and buildings that fail to meet warrantability standards are deemed non-warrantable by exclusion.

No matter how strong a home buyer’s individual mortgage qualifications, a non-warrantable condo cannot be approved except through portfolio lending.

There are four common reasons why a condominium building may be classified non-warrantable.

  1. The building ownership is concentrated with a few owners
  2. The building units are mostly rental units
  3. The building lacks cash reserves
  4. The building is in litigation

Building ownership

One key feature of a non-warrantable condo is the ownership structure. If a single entity owns multiple units in a complex and total ownership exceeds 20 percent, the building typically falls into the non-warrantable category. High ownership concentrations pose a risk to lenders, as the condo’s financial health could be overly dependent on a single owner avoiding financial difficulty.

Occupancy types

Another risk feature in condominiums is the collective occupancy of the building. If a majority of the units are investment properties or rental units, the condo may be classified as non-warrantable. Lenders view rental properties as higher risk because rental properties may not be as well-maintained as owner-occupied units and, should the owner of an investment property face financial difficulty, it may abandon or fire sale its unit to the harm of other building owners.

Financial reserves

When a condo building seeks its warrantability approval, its budget and financial health are scrutinized. A condo may be non-warrantable if the homeowners association (HOA) does not allocate at least 10 percent of its dues to a reserve fund for maintenance and emergencies or if more than 15 percent of the units are at least 60 days past due on their assessments.

Legal risk

A condo building may be deemed non-warrantable if the condo complex or its developer is involved in litigation. However, active or pending litigation does not automatically exclude condo buildings from warrantability – especially when the matter is unrelated to the building’s safety, structural soundness, and habitability.

Non-Warrantable Condominium: A Real World Example

First-Time Home Buyer Stories: Non-Warrantable Condominium

Imagine a first-time home buyer who wants to buy a condo in a 100-unit complex. The building is well-maintained, and the unit is listed at a fair price on the local MLS. The buyer goes to get a mortgage pre-approval from a lender and learns a few things.

First, the original developer withheld thirty units to keep as rentals when they initially sold the building. This raises a red flag for mortgage companies because the developer owns 30 percent of the units.

Next, the buyer finds out that twenty-five other condo owners rent their units, too, which raises the building’s renter concentration to 55 percent, which is above the condo warrantability limit.

Then, they discover that many owners in the building are late on their monthly assessments.

The lender tells the buyer that conventional and FHA loan mortgage guidelines preclude them from financing in the building. The lender offers a portfolio loan instead, with similar mortgage rates and a larger down payment requirement.

Common Questions About Non-Warrantable Condominium

What makes a condo non-warrantable?

A condo is non-warrantable if it does not meet specific criteria, such as a certain percentage of owner-occupied units, a limit on single-entity ownership, appropriate budgeting by the HOA, and the absence of ongoing litigation.

Can you get a mortgage for a non-warrantable condominium?

Yes, home buyers can get mortgage financing for non-warrantable condos, but rarely via traditional lending sources. Lenders specializing in non-warrantable condo mortgages generally require larger down payments and may charge higher interest rates.

What should I do if I’m interested in a non-warrantable condo?

If you’re considering a non-warrantable condo, it’s important to be aware of the financing hurdles. Look for lenders who have experience with non-warrantable condo loans. Additionally, carefully assess the investment risks and potential advantages of the property.

Can a non-warrantable condo become warrantable?

Yes, a non-warrantable condo can get approved for financing when the factors disqualifying it from warrantable status – such as a high investor ownership or pending litigation – are resolved.

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       A non-warrantable condominium is a condo unit or building that fails to meet the minimum financing standards of government-backed mortgage groups.

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